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3. Your Credit Terms
3.1 Make sure every customer understands your credit terms.
- Agree the terms, then ask the customer to sign a copy of the agreement.
3.2 Set out the maximum credit period.
- How many days after the invoice date is payment due?
- Or should the customer pay on a fixed day of each week or month?
3.3 Have a standard sales contract (your lawyer or a trade body can help with the wording).
Consider including such terms as:
- You still own the goods, after delivery to the customer, until they are paid for. Check whether your insurance covers any goods damaged on customers' premises.
- The customer must tell you within a set time if a delivery has not been received. A clause like this helps to avoid disputes.
3.4 Check trading terms when doing business with other European Union states.
- Their custom and practice may differ from the UK, eg they may have generally longer payment terms.
3.5 You can offer a discount for quick payment to boost cashflow, but always remember to cost this properly.
- Beware of customers who take prompt payment discounts and still pay late.
3.6 A settlement rebate for good payers can often be more effective than discounts.
- You may give regular rebates to customers who have paid on time, based on a percentage of the value of their purchases.
3.7 Imposing penalties for late payment used to be virtually unenforceable. Now it is provided for in law. All businesses can claim interest on late payments, and in many cases, can claim for debt recovery costs.
- You can recover interest from business debtors at 8% above the Bank of England base rate. This is straightforward to calculate (see the interest calculator at www.payontime.co.uk/calculator/index_new.html).For consumer debtors you should discuss the issue of interest with your legal adviser.
- The interest must be calculated on a daily basis for each day payment is overdue.
- If you think you may decide to charge interest, tell customers in writing, and draw attention to your right to do so in your terms and conditions. This does not oblige you to collect interest.